Professional Documents
Culture Documents
Chapter 1: Introduction To Corporate Governance
Chapter 1: Introduction To Corporate Governance
WHAT IS GOVERNANCE?
✓ It generally refers to a process whereby elements in society wield power, authority and
influence and enact policies and decisions concerning public life and social upliftment.
✓ It means the process of decision-making and the process by which decisions are implemented
(or not implemented) through the exercise of power or authority by leaders of the country
and/or organizations.
Whatever context good governance is used, the following major characteristics are briefly
described as follows:
➢ Participation
Participation by both men and women is a key cornerstone of good governance. Participation
could be either direct or through legitimate institutions or representatives. It is important to point out
that representative democracy does not necessarily mean that the concern of the most vulnerable in
society would not be taken into consideration in decision making. Participation needs to be informed
and organized. This means freedom of association and expression on one hand and an organized civil
society on the other hand.
➢ Rule of Law
Good governance requires fair deal frameworks that are enforced impartially. It also requires
full protection of human rights, particularly those of minorities. Impartial enforcement of laws
requires an independent judiciary and an impartial and incorruptible police force.
➢ Transparency
Transparency means that decisions taken and their enforcement are done in a manner that
follows rules and regulations. It means that information is freely available and directly accessible to
those who will be affected by such decisions and their enforcement. It also means that enough
information is provided and that it is provided easily understandable forms and media.
➢ Responsiveness
Good governance requires that institutions and processes try to serve the needs of all
stakeholders within a reasonable timeframe.
➢ Consensus Oriented
Good governance requires mediation of the different interests in society to reach a broad
consensus on what is in the best interest of the whole community and how this can be achieved. It also
requires a broad and long-term perspective on what is needed for sustainable human development and
how to achieve the goals of such development. This can only result from an understanding of the
historical, cultural, and social contexts of a given society or community.
Ensures that all its members feel that they have a stake in it and do not excluded from the
mainstream of society. This requires all groups, but particularly the most vulnerable, have
opportunities to improve or maintain their well-being.
Good governance means that processes and institutions produce results that meet the needs of
society while making the best use of resources at their disposal. The concept of efficiency in the
context of good governance also covers the sustainable use of natural resources and the protection of
the environment.
➢ Accountability
CORPORATE GOVERNANCE
✓ It is defined as the system of rules, practices and processes by which business corporations are
directed and controlled. It basically involves balancing the interests of a company’s many
stakeholders, such as shareholders, management, customers, suppliers, financiers, government,
and the company.
✓ It is a topic that has received growing attention in the public in recent years as policy makers
and others become more aware of the contribution good corporate governance makes to
financial market stability and economic growth. Good corporate governance is all about
controlling one’s business and so is relevant, and indeed vital, for all organizations, whatever
size, or structure.
✓ Its structure specifies the distribution of rights and responsibilities among different participants
in the corporation, such as the board, managers, shareholders, and other stakeholders, and
spells out the rules and procedures for making decisions on corporate affairs. By doing this, it
also provides the structure through which the objectives are set and the means of attaining
those objectives and monitoring performance.
✓ Self-assessment.
Effective corporate governance is transparent, protects the rights of shareholders and includes
both strategic and operational risk management. It is concerned in both the long-term earning potential
as well as actual short-term earnings and holds directors accountable for their stewardship of the
business.
The basic principles of good and effective corporate governance are threefold as presented
below:
➢ Transparency and Full Disclosure. Is the board telling us what is going on?
✓ Does the composition mix of board membership ensure an appropriate range and mix of
expertise, diversity, knowledge and added value?
✓ Is the organization’s senior official committed to widely accepted standards of correct and
proper behavior?
✓ Has the board built long-term sustainable growth in shareholders’ value for the
corporation?
▪ Are conflicts of interest avoided and the organization’s best interests prevail at all
time?
Shareholders/
Board of Owners
Directors
External
Executive Auditors
Delegate Manageme Have
nt
Shareholde
rs/ Owners Accountabilities
Operational Regulators
Responsibilities
Manageme
nt
Internal Society and
Auditors Others
✓ The board of directors and its audit committee oversee management and, in that role, are
expected to protect the shareholder’s rights. However, it is important to recognized that
management is part of the governance framework; management can influence who sits on the
board and the audit committee as well as other governance controls that might be put into
place.
✓ In return for the responsibilities (and power) given to management and the board, governance
demands accountability back through the system to the shareholders. However, the
accountabilities do not extend only to the shareholders. Companies also have responsibilities
to other stakeholders. Stakeholders can be anyone who is influenced, whether directly or
indirectly, by the actions of a company. Management and the board have responsibilities to
act within the laws of society and to meet various requirements of creditors, employees, and
the stakeholders.
✓ While shareholders/owners delegate responsibilities to various parties within the corporation,
they also require accountability as to how well the resources that have been entrusted to
management and the board have been used. For example, the owners want accountability on
such things as:
▪ Financial performance
▪ Financial transparency
▪ Stewardship
✓ The owners want disclosures from management that are accurate and objectively verifiable.
For instance, management has a responsibility to provide financial reports, and in some cases,
reports on internal control effectiveness. Management has always had the primary
responsibility for the accuracy and completeness of an organization’s financial statements.
From a financial reporting perspective, it is management’s responsibility to:
▪ Choose which accounting principles best portray the economic substance of company
transactions.
▪ Ensure that the financial statements contain accurate and complete disclosure.
Corporate governance and financial reporting reliability are receiving considerable attention
from a number of parties including regulators, standard setting bodies, the accounting profession,
lawmakers and financial statement users.
• Overall operations
• Performance
• Compliance/Legal Conformance
✓ On November 10, 2016, the Securities and Exchange Commission approved the Code of
Corporate Governance for publicly listed companies. Its goal is to help companies develop and
sustain an ethical corporate culture and keep abreast with recent developments in corporate
governance.
✓ One of its salient provisions is for publicly listed companies to establish a code of business
conduct and submit a new manual on Corporate Governance that would “provide standards for
professional and ethical behavior as well as articulate acceptable and unacceptable conduct &
practices”. The Board of Directors is required to implement the code and make sure that
management and employees comply with the internal policies set.
The company should be headed by a competent, working board to foster the long-term success
of the corporation, and to sustain its competitiveness and profitability in a manner consistent with its
corporate objectives and the long-term best interests of its shareholders.
✓ Recommendation 1.3 The Company should provide in its Board Charter and Manual
on Corporate Governance a policy on the training of directors, including an orientation
program for first-time directors and relevant annual continuing training for all directors.
✓ Recommendation 1.5 The Board should ensure that it is assisted in its duties by a
Corporate Secretary, who should be a separate individual from the Compliance Officer. The
Corporate Secretary should not be a member of the Board of Directors and should annually
attend a training on corporate governance.
✓ Recommendation 1.6 The Board should ensure that it is assisted in its duties by a
Compliance Officer, who should have a rank of Senior Vice-President or an equivalent
position with adequate stature and authority in the corporation. The Compliance Officer should
not be a member of the Board of Directors and should annually attend a training on corporate
governance.
The fiduciary roles, responsibilities and accountabilities of the Board as provided under the
law, the company’s articles and by-laws, and other legal pronouncements and guidelines should be
clearly made known to all directors as well as to stockholders and other stakeholders.
✓ Recommendation 2.1 The Board members should act on a fully informed basis, in
good faith, with due diligence and care, and in the best interest of the company and all
shareholders.
✓ Recommendation 2.2 The Board should oversee the development of and approve the
company’s business objectives and strategy, and monitor their implementation, in order to
sustain the company’s long-term viability and strength.
✓ Recommendation 2.3 The Board should be headed by a competent and qualified
Chairperson.
✓ Recommendation 2.4 The Board should be responsible for ensuring and adopting an
effective succession planning program for directors, key officers, and management to
ensure growth and a continued increase in the shareholders’ value.
✓ Recommendation 2.5 The Board should align the remuneration of key officers and
board members with the long-term interests of the company. In doing so, it should
formulate and adopt a policy specifying the relationship between remuneration and
performance. Further, no director should participate in discussions or deliberations
involving his own remuneration.
✓ Recommendation 2.6 The Board should have and disclose in its Manual on Corporate
Governance a formal and transparent board nomination and election policy that should
include how it accepts nominations from minority shareholders and reviews nominated
candidates.
✓ Recommendation 2.7 The Board should have the overall responsibility in ensuring that
there is a group-wide policy and system governing related party transactions (RPTs) and
other unusual or infrequently occurring transactions, particularly those which pass certain
thresholds of materiality.
✓ Recommendation 2.8 The Board should be primarily responsible for approving the
selection and assessing the performance of the Management led by the Chief Executive
Officer (CEO), and control functions led by their respective heads.
✓ Recommendation 2.10 The Board should oversee that an appropriate internal control
system is in place, including setting up a mechanism for monitoring and managing
potential conflicts of interest of Management, board members, and shareholders. The
Board should also approve the Internal Audit Charter.
✓ Recommendation 2.11 The Board should oversee that a sound enterprise risk
management (ERM) framework is in place to effectively identify, monitor, assess and
manage key business risks. The risk management framework should guide the Board in
identifying units/business lines and enterprise-level risk exposures, as well as the
effectiveness of risk management strategies.
✓ Recommendation 2.12 The Board should have a Board Charter that formalizes and
clearly states its roles, responsibilities and accountabilities in carrying out its fiduciary
duties. The Board Charter should serve as a guide to the directors in the performance of
their functions and should be publicly available and posted on the company’s website.
Board committees should be set up to the extent possible to support the effective performance
of the Board’s functions, particularly with respect to audit, risk management, related part
transactions, and other key corporate governance concerns, such as nomination and remuneration.
✓ Recommendation 3.1 The Board should establish board committees that focus on
specific board functions to aid in the optimal performance of its roles, and responsibilities.
✓ Recommendation 3.2 The Board should establish an Audit Committee to enhance its
oversight capability over the country’s financial reporting, internal control system, internal
and external audit processes, and compliance with applicable laws and regulations.
To show full commitment to the company, the directors should devote the time and attention
necessary to properly and effectively perform their duties and responsibilities, including sufficient
time to be familiar with the corporation’s business.
✓ Recommendation 4.1 The directors should attend and actively participate in all
meetings of the Board, Committees, and Shareholders in person or through the
tele/videoconferencing, conducted in accordance with the rules and regulations of the
Commission, except when justifiable causes, such as illness, death in the immediate family
and serious accidents, prevent them from doing so.
✓ Recommendation 4.3 A director should notify the Board where he/she is an incumbent
director before accepting a directorship in another company.
The Board should endeavor to exercise objective and independent judgment on all corporate
affairs.
✓ Recommendation 5.1 The Board should have at least three independent directors, or
such number as to constitute at least one-third of the members of the Board, whichever is
higher.
✓ Recommendation 5.2 The Board should ensure that its independent directors possess
the necessary qualifications and none of the disqualifications for an independent director to
hold the position.
✓ Recommendation 5.3 The Board’s independent directors should serve for a maximum
cumulative term of nine years. After which, the independent director should be perpetually
barred from re-election as such in the same company, but may continue to qualify for
nomination and election as a non-independent director.
✓ Recommendation 5.4 The positions of the Chairman of the Board and Chief Executive
Officer should be held by separate individuals and each should have clearly defined
responsibilities.
✓ Recommendation 5.5 The Board should designate a lead director among the
independent directors if the Chairman of the Board is not independent, including if the
positions of the Chairman of the Board and Chief Executive Officer are held by one
person.
The best measure of the Board’s effectiveness is through an assessment process. The Board
should regularly carry out evaluations to appraise its performance as a body, and assess whether it
possesses the right mix of backgrounds and competencies.
✓ Recommendation 6.2 The Board should have in place a system that provides, at the
minimum, criteria and process to determine the performancde of the Board, the individual
directors, committees and such system should allow for a feedback mechanism from the
shareholders.
Members of the Board are duty-bound to apply high ethical standards, taking into account the
interests of all stakeholders.
✓ Recommendation 7.1 The Board should adopt a Code of Business Conduct and Ethics,
which would provide standards for professional and ethical behavior, as well as articulate
acceptable and unacceptable conduct and practices in internal and external dealings.
✓ Recommendation 7.2 The Board should ensure the proper and efficient
implementation and monitoring of compliance with the Code of Business Conduct and
Ethics and internal policies.
✓ Recommendation 8.1 The Board should establish corporate disclosure policies and
procedures to ensure a comprehensive, accurate, reliable and timely report to shareholders
and other stakeholders that gives a fair and complete picture of a company’s financial
condition, results and business operations.
✓ Recommendation 8.2 The Company should have a policy requiring all directors and
officers to disclose/report to the company any dealings in the company’s shares within
three business days.
✓ Recommendation 8.3 The Board should fully disclose all relevant and material
information on individual board members and key executives to evaluate their experience
and qualifications, and assess any potential conflicts of interest that might affect their
judgment.
✓ Recommendation 8.4 The company should provide a clear disclosure of its policies
and procedure for setting Board and executive remuneration, as well as the level and mix
of the same in the Annual Corporate Governance Report.
✓ Recommendation 8.5 The company should disclose its policies govering Related Party
Transactions (RPTs) and other unusual or infrequently occuring transactions in their
Manual on Corporate Governance.
✓ Recommendation 8.6 The company should make a full, fair, accurate and timely
disclosure to the public of every material fact or event that occurs, particularly on the
acquisition or disposal of significant assets, which could adversely affect the viability or
the interest of its shareholders and other stakeholders.
✓ Recommendation 9.1 The Audit Committee should have a robust process for
approving and recommending the appointment, reappointment, removal, and fees of the
external auditor should be recommended by the Audit Committee, approved by the Board
and ratified by the shareholders.
✓ Recommendation 9.3 The company should disclose the nature of non-audit services
performed by its external auditor in the Annual Report to deal with the potential conflict of
interest.
➢ PRINCIPLE 10: INCREASING FOCUS ON NON-FINANCIAL AND SUSTAINABILITY
REPORTING
The company should ensure that material and reportable non-financial and sustainability issues
are disclosed.
✓ Recommendation 10.1 The Board should have a clear and focused policy on the
disclosure of non-financial information, with emphasis on the management of economic,
environmental, social and governance (EESG) issues of its business, which underpin
sustainability.
The company should maintain a comprehensive and cost-efficient communication channel for
disseminating relevant information. This channel is crucial for informed decision-making by
investors, stakeholders, and other interested users.
✓ Recommendation 11.1 The company should include media and analysts’ briefings as
channels of communication to ensure the timely and accurate dissemination of public,
material and relevant information to its shareholders and other investors.
To ensure the integrity, transparency, and proper governance in the conduct of its affairs, the
company should have a strong and effective internal control system and enterprise risk
management framework.
✓ Recommendation 12.1 The Company should have an adequate and effective internal
control system and an enterprise risk management framework in the conduct of its
business, taking into account its size, risk profile and complexity of operations.
✓ Recommendation 12.2 The Company should have in place an independent internal audit
function that provides an independent and objective assurance, and consulting services
designed to add value and improve the company’s operations.
✓ Recommendation 12.4 Subject to its size, risk profile and complexity of operations, the
company should have a separate risk management function to identify, assess and monitor
key risk exposures.
The company should treat all shareholders fairly and equitably, and also recognize, protect and
facilitate the exercise of their rights.
✓ Recommendation 13.1 The Board should ensure that basic shareholder rights are
disclosed in the Manual on Corporate Governance and on the company’s website.
✓ Recommendation 13.4 The Board should make available, at the option of a shareholder,
an alternative dispute mechanism to resolve intra-corporate disputes in an amicable and
effective manner.
✓ Recommendation 13.5 The Board should establish an Investor Relations Officer (IRO)
to ensure constant engagement with its shareholders. The IRO should be present at every
shareholders’ meeting.
DUTIES TO STAKEHOLDERS
The rights of stakeholders established by law, by contractual relations and through voluntary
commitments must be respected. Where stakeholders’ rights and/or interests are at stake,
stakeholders should have the opportunity to obtain prompt effective redress for the violation of
their rights.
✓ Recommendation 14.1 The Board should identify the company’s various stakeholders
and promote cooperation between them and the company in creating wealth, growth and
sustainability.
✓ Recommendation 14.2 The Board should establish clear policies and programs to
provide a mechanism on the fair treatment and protection of stakeholders.
✓ Recommendation 14.3 The Board should adopt a transparent framework and process
that allow stakeholders to communicate with the company and to obtain redress for the
violation of their rights.
✓ Recommendation 15.1 The Board should establish policies, programs and procedures
that encourage employees to actively participate in the realization of the company’s goals
and in its governance.
✓ Recommendation 15.2 The Board should set the tone and make a stand against corrupt
practices by adopting an anti-corruption policy and program in its Code of Conduct.
✓ Recommendation 15.3 The Board should establish a suitable framework for
whistleblowing that allows employees to freely communicate their concerns about illegal
or unethical practices, without fear of retaliation and to have direct access to an
independent member of the Board or a unit created to handle whistleblowing concerns.
The company should be socially responsible in all its dealings with the communities where it
operates. It should ensure that its interactions serve its environment and stakeholders in a positive
and progressive manner that is fully supportive of its comprehensive and balances development.
✓ Recommendation 16.1 The company should recognize and place an importance on the
interdependence between business and society, and promote a mutually beneficial
relationship that allows the company to grow its business while contributing to the
advancement of the society where it operates.
DEFINITION OF TERMS:
➢ Board of Directors – the governing body elected by the stockholders that exercises the
corporate powers of corporation conducts all its business and controls its properties.
➢ Non-executive director – a person who has no executive responsibility and does not perform
any work related to the operations of the corporation.
➢ Internal Control – a process designed and effected by the board of directors, senior
management, and all levels of personnel to provide reasonable assurance on the achievement
of objectives through efficient and effective operations; reliable, complete and timely financial
and management information; and compliance with applicable laws, regulations, and the
organization’s policies and procedures.
➢ Stakeholders – any individual, organization or society at large who can either affect and/or be
affected by the company’s strategies, policies, business decisions and operations, in general.
ETHICS
✓ It is a set of moral principles or values that govern the actions and decisions of an individual or
group.
✓ Examples of prescribed set of values at the implementation level include laws and regulations,
church doctrine, code of business ethics for professional groups such as CPAs, and codes of
conduct within an individual organization.
✓ It is common for people to differ in their moral principles or values. Even if two people agree
on the ethical principles that determine ethical behavior, it is unlikely that they will agree on
the relative importance of each principle. These differences result from all our life experiences.
Parents, teachers, friends, and employers are known to influence our values, but so do
television, team sports, life successes and failures, and thousands of other experiences.
➢ FAIRNESS AND OPENNESS – Be fair and open-minded, be willing to admit error and,
where appropriate, change positions and beliefs, demonstrate a commitment to justice, the
equal treatment of individuals, and tolerance for acceptance of diversity; do not overreach or
take advantage of another’s mistakes or diversities.
➢ RESPECT FOR OTHERS – Demonstrate respect for human dignity, privacy, and the right to
self-determination of all people; be courteous, prompt and decent; provide others with the
information they need to make informed decisions about their own lives; do not patronize,
embarrass, or demean.
➢ RESPONSIBLE CITIZENSHIP – Obey just laws; if all law unjust, openly protest it;
exercise all democratic rights and privileged responsibly by participation (voting and
expressing informed views), social consciousness, and public service; when in a position of
leadership or authority, openly respect and honor democratic processes of decision making,
avoid unnecessary secrecy or concealment of information, and assure that others have all
information they need to make intelligent choices and exercise their rights.
➢ PURSUIT EXCELLENCE – Pursue excellence in all matters; in meeting your personal and
professional responsibilities, be diligent, reliable, industrious and committed; perform all task
to the best of your ability, develop and maintain a high degree of competence, be well
informed and well prepared; do not be content with mediocrity; do not “win at any cost”.
✓ The need for ethics in society is sufficiently important that many commonly held ethical values
are incorporated into laws.
✓ A considerable portion of ethical values of a society cannot be incorporated into laws because
of the judgmental nature of certain values (cheating, stealing, deceiving, lying) and those that
deal with many aspects of principles (integrity, loyalty, pursuit of excellence) but are important
for an orderly society.
✓ Business decisions influence employees, customers, suppliers and competitors, while company
operations affect communities, governments and the environment.
✓ The person’s ethical standards are different from those of society as a whole.
➢ Professional Ethics
✓ Professional competence
✓ Confidentiality
✓ Professional behavior
➢ Business Ethics
✓ Fair competition
✓ Social responsibility
Professional are required not only to have an ethical commitment, a personal resolve to act
ethically, but also have both ethical awareness and ethical competency. Ethical awareness refers to
the ability to discern between right and wrong, while ethical competency pertains to the ability to
engage in sound moral reasoning and consider carefully of alternative actions.
✓ Service to Others
✓ Professional Competence
✓ Global Competitiveness
✓ It refers to standards of moral conduct, behavior, and judgment in business. It involves making
the moral and right decisions while engaging in such business activities as manufacturing and
selling a product and providing a service to customers.
✓ It is an area of corporate responsibility where businesses are legally bound and socially obliged
to conduct business in an ethical manner.
➢ Main Purpose
The main purpose of business ethics is to help business and would-be business to
determine what business practices are right and what are wrong. Hopefully, they are going to
use this knowledge to guide them in making the right business decisions.
➢ Special Purpose
✓ To make businessmen realize that they cannot employ double standards to the actions
of other people and to their own actions.
✓ To show businessmen that common practices which they have thought to be right
because they see other businessmen doing it, are really wrong.
➢ Business ethics covers all conduct, behavior, and judgment in business. This includes the
slightest deviation from what is right to illegal and dishonest acts that are punishable by law.
It involves making the right choices while engaging in such business activities as
manufacturing and selling a product or selling and rendering a service.
➢ Generally, actions that are not forbidden by law are ethical. In some cases, however, what is
legal may be unethical. Business ethics therefore covers even acts that may be legal but which
are wrong because they violate ethical principles.
➢ Business ethics is based on the personal values and standards of each person engaged in
business. Since individual differ, what is ethical or unethical in making profit also varies from
person to person. And here lies the problem. There is still no uniform standards of right and
wrong from which all business may base their actions.
➢ The businessman who provides fair business competition is the most likely to observe the
business ethical rules of conduct, behavior and judgment. Fair business competition means
achieving success solely by offering better products, services and terms than the competitor. It
is a form of business competition where success is gained by the merits of one’s goods or
services.
➢ SOCIAL IMPACT. The social impact of corporate governance contributes to ethical climate
of society. If businesses offer bribes to secure work or other benefits, engage in accounting
fraud or breach regulatory and legal limitations on their operations, the ethics of society suffer.
In addition to a deteriorating ethical environment, such as corruption may unfairly raise the
price of goods for consumers or the quality of the product or service compromised.
A manager should:
✓ Acknowledge that his role is to serve the business enterprise and the community;
✓ Avoid all abuse of executive power for personal gain, advantage or prestige;
✓ Reveal the fact to his superior whenever his personal business of financial interests
conflict with those of the company;
✓ Be actively concerned with the difficulties and problems of subordinates, treat them
fairly and by example, lead them effectively, assuring to all the right of reasonable
access and appeal to superiors;
✓ Recognize that his subordinates, have a right to information on matter affecting them,
and make provision for its prompt communication unless such communication is likely
to undermine the security and efficiency of the business;
✓ Fully evaluate the likely effects on employees and the community of the business plans
for the future before taking a final decision and
✓ Cooperate with his colleagues and not attempt to secure personal advantage at their
expense.
Cited in the article “Ethical Challenges in Today’s World” written by Ms. Mercedes B. Suleik
published in Business Mirror on February 13, 2018 is the message of Pope Francis in his Ecumenical,
Evangeli Gaudium
“Humanity is experiencing a turning point in its history as can be seen from the advances
occurring in the sciences and technology. We are in age of knowledge and information and that
this has led to new and often anonymous kinds of power. We have today an economy of exclusions
and inequality”.
“In a system that idolizes increased profit, everything that stands in its way is pushed aside.
Behind this attitude lurks a rejection of ethics. Ethics has come to be viewed with derision as being
counterproductive. Ethics is felt to be a threat because it condemns the manipulation and
debasement of the person and that ethics leads to a call for a committed response, which is outside
of the categories of the marketplace.”
“Humanity has a mission and the means to transform the world in justice and love in
human relations, even in the social and economic field. Market economics must be underpinned by
commitments to particular moral goods and a certain version of the human person if it is to serve
rather than undermine humanity’s common good. The economy needs ethics in order to function
correctly – not an ethics which is people-oriented.”